Ethereum: Understanding The Investment Beyond The Hype

Ethereum is a blockchain platform that supports smart contracts and secure financial transactions. Its native cryptocurrency is called Ether (ETH).

Ethereum is one of the leading cryptocurrencies, alongside Bitcoin, and has risen in popularity in recent years. It offers utilitarian value through its ecosystem of decentralised apps.

If you're looking to invest in Ethereum, you'll need to use a crypto exchange platform such as Coinbase, Kraken, Gemini, Binance, Bitfinex, or Bitstamp. You'll also need to consider how you will store your cryptocurrency, either through an online hot wallet or an offline cold wallet.

It's important to remember that investing in Ethereum is a risky endeavour, as the market is volatile and subject to rapid fluctuations.

Risk tolerance and investment portfolio diversity

Risk tolerance is the degree of risk that an investor is willing to accept, given the volatility in the value of an investment. It is an important component of investing, often determining the type and amount of investments that an individual chooses. An investor's risk tolerance is influenced by their age, investment goals, and income.

Ethereum, like Bitcoin, is a cryptocurrency with a bullish momentum in 2024. Both are prone to extreme price volatility, and buying either crypto requires a high-risk tolerance.

When it comes to choosing a cryptocurrency trading platform, the type of exchange—centralized or decentralized—depends on your preferences and risk tolerance. Centralized exchanges (CEXs) are businesses that store user keys, provide order-matching services, and charge fees for their services. Decentralized exchanges (DEXs) connect users who rely on smart contracts to execute trades, with users maintaining control of their keys and wallets.

Your risk tolerance will influence your investment portfolio. Modern portfolio theory suggests that investors attempt to maximize the expected portfolio return for a given portfolio risk by carefully selecting the proportion of various assets. People with stronger risk tolerance are more likely to invest in riskier assets and have a higher proportion of risky assets in their portfolio.

As you approach retirement, you may want to assess your comfort with risk, adjust the mix of assets in your portfolio, and select a diverse range of investments to protect your portfolio from market volatility. A moderate risk-tolerant investor, for example, may choose a 60/40 or 50/50 portfolio structure, investing in stocks, bonds, and cash.

Determining your risk tolerance, constructing an asset allocation strategy, and diversifying your underlying investments can be complex. Financial advisors can help you understand and apply these concepts and regularly review your portfolio's progress.

Choosing a crypto exchange

When choosing a crypto exchange, there are several factors to consider. Here are some key points to keep in mind:

• Authenticity and Security: Conduct thorough research to ensure the exchange is legitimate and secure. Check the platform's reputation and the security protocols they have in place to protect your data and funds.
• Payment Methods: Different platforms support various payment methods, such as bank transfers, PayPal, credit cards, or debit cards. Choose an exchange that offers a payment method that suits your needs, especially if you are a beginner and don't already own any cryptocurrency.
• Supported Coins and Tokens: While most exchanges support Bitcoin and Ethereum, consider the variety of cryptocurrencies offered if you want to invest in other coins. Binance, for example, offers access to a wide range of altcoins.
• Transaction Fees: Understand the fee structure of the exchange, as fees can vary significantly. Look for transparent platforms that don't have hidden transaction fees, and consider those that offer flat rates or flexible structures.
• User Interface and Experience: Choose an exchange with an intuitive interface and a good user experience, making it easier to trade cryptocurrencies. Also, consider the customer service and other customer-related functionalities offered.
• Regulatory Compliance: Ensure the exchange complies with regulatory requirements, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) rules. This indicates that the platform adheres to financial regulations and helps protect users from fraudulent activities.
• Advanced Features: If you are an experienced trader, look for exchanges that offer advanced trading features like margin trading, futures trading, and volume discounts. Additionally, some exchanges provide crypto staking, lending, and other investment options.
• Reputation and Reviews: Research the exchange's reputation by reading customer reviews and checking its history. This can provide valuable insights into the platform's reliability and user satisfaction.
• Availability and Accessibility: Check if the exchange is available in your country or state, as some platforms have geographical restrictions. Also, consider the ease of use and whether the platform provides a user-friendly mobile app.

Some popular crypto exchanges include:

• Binance: Offers a wide range of coins and advanced features; available in over 100 countries.
• Coinbase: User-friendly interface, strong security, and a large number of supported cryptocurrencies; available in over 100 countries.
• Kraken: One of the oldest and most reputable exchanges, offering a wide range of coins and advanced trading features; not available in all U.S. states.
• Crypto.com: Supports over 350 cryptocurrencies and provides a robust mobile app; available in 90 countries.
• Gemini: Emphasizes security and compliance, insures user funds, and offers a simple, intuitive platform; available in all 50 U.S. states.

Funding your account

Before you can buy Ethereum through a crypto exchange, you have to fund your account. In most cases, you’ll deposit money from a bank account, such as your personal checking or savings account. You can also generally complete wire transfers, use a debit card, or deposit money from PayPal.

When choosing a funding method, review the crypto exchange’s fees; they can vary based on the method. For example, some platforms allow you to buy cryptocurrency using a credit card, but credit card companies generally consider crypto purchases to be cash advances, which may attract higher interest rates and cash advance fees.

Cryptocurrency exchanges do not generally have high minimum investments, so you can invest as little as $5 or as much as $1,000 or more. Most exchanges have fees per trade, so it can be best to trade large amounts at once.

Buying Ethereum

Ethereum is a blockchain platform that supports smart contracts and secure financial transactions. Its native cryptocurrency is called Ether (ETH). Ethereum is the second-largest cryptocurrency in the world, after Bitcoin, with a market cap of $420 billion (as of June 2024).

How to Buy Ethereum

• Identify a Platform: Choose a cryptocurrency exchange platform such as Coinbase, Kraken, Gemini, Binance, Bitfinex, or Bitstamp. Consider the type of exchange (centralized or decentralized), fees, security, and your risk tolerance.
• Create an Account: Sign up and provide the necessary information, such as your name, address, and identification. Verify your account through the platform's Know Your Client (KYC) procedures.
• Fund Your Account: Deposit funds into your account using a bank transfer, wire transfer, debit card, or PayPal. Review the exchange's fees for each funding method. Avoid using a credit card due to higher interest rates and cash advance fees.
• Purchase Ethereum: On the exchange, enter the amount of Ethereum you want to buy. You can purchase a fraction of an Ether coin if you don't want to buy a whole coin. Confirm the transaction and allow for processing time.
• Store Your Ethereum: You can choose to store your Ethereum on the exchange or withdraw it to a third-party wallet. There are two types of wallets: hot wallets (online) and cold wallets (offline). Hot wallets are more convenient but carry a higher risk of security breaches. Cold wallets are safer but less accessible, requiring a manual connection to access your crypto.

Things to Consider

• Risk and Volatility: Buying Ethereum carries a higher risk due to the volatile nature of the cryptocurrency market. Consider your risk tolerance and ensure you only invest what you can afford to lose.
• Tax Implications: Consult a tax professional when selling large amounts of crypto as profits are typically subject to capital gains taxes.
• Diversification: Ensure your investment portfolio is diversified, and only allocate a portion of your investments to Ethereum and other cryptocurrencies.

Storing your Ethereum

Once you've purchased Ethereum, you'll need to withdraw it to a wallet that you control. The safest way to store your Ethereum is to use a regulated, centralised exchange and then transfer your keys to your wallet. You can then place them on a cold storage device.

There are several options for storing Ethereum, each with pros and cons. Here are some of the most trusted wallets:

• Geth (go implementation): Command Line, Official
• Parity: Rust implementation
• Ledger: Can be used with MyCrypto, the Ledger Live Desktop Application, iOS app, and Android app
• Trezor: Can be used with MyCrypto or Trezor's web app
• Desktop Applications
• MyCrypto: Also has a web version with support via Ledger, Trezor, Safe-T Mini, MetaMask, Parity Signer
• Exodus: Desktop, multi-asset wallet with ShapeShift integration
• ImToken: iOS, Android. Longest-running mobile solution for Ethereum. Tons of features
• Trust Wallet: iOS + Android, dApp browser
• WallETH: Android, Open Source
• Parity Signer: Turns your old phone into a hardware wallet/transaction signer. Can be used with MyCrypto

When choosing a wallet, consider your desire for security, how much you will be holding, and what you plan on doing with the Ethereum or tokens stored there. It's important to understand how to use the wallet with confidence and to safely store all the necessary information in multiple places.

Frequently asked questions